Substantially Equal payment accident
I set up an IRA substanially equal payments for my 56 year old client in December, 2009, with annual payments to automatically go out every December for 5 years. The IRA custodian got first payment out the door on January 4, 2010! I saw it, but it didn’t register that I would need to fix anything for future payments. Next payment hit (right on time) in December, 2010. I neglected to remember that the previous one was in January.
Is there any leeway that the CPA could refile for 2009 and say that the payment was, in fact a 2009 payment? (that was a low income year for my client)
If not, can my client declare that his Substantially Equal Payments began in December, 2010? I’d like to minimize the damage here.
Thanks,
Permalink Submitted by Alan Spross on Mon, 2011-02-28 21:12
Up to perhaps a couple weeks ago, the 12/2010 payment could have been rolled back to the IRA leaving only the 1/2010 payment. This might have have worked, but even then with an actual inception date of 1/2010, the interest rate used for the plan based on a 12/09 start date may no longer have been correct. Depends on which month’s rate was used (Oct vrs Nov 2009 rate).
Am sure the rush in 12/09 was to be able to get the full annual amount distributed for 2009, but problems with late monthly distributions happen quite often, so it is always wise to not take distributions after around the 12th of the month. That leaves time to double check the annual figures in December and to get a correction done before year end, if needed.
What was reported on the 2009 tax return? Nothing, since there was no 2009 1099R showing a distribution?
Chance may be good for a favorable letter ruling, but the PLR request costs about 10k plus legal costs. One option is to see if the custodian allows you to roll the last payment back to the IRA and instead of requesting a 72t PLR, instead request a much less expensive 60 day rollover extension PLR using the reason for extending the 60 day limit being what you discovered happened with respect to two SEPP distributions happening in the same year. A positive ruling will erase the tax bill for the second 2010 distribution and preserve the original plan starting 1/2010 if the amount received in 1/2010 works with a Nov or Dec 2009 interest rate.
Sometimes you can back into a plan with some retroactive tactics, but this Dec-Jan problem bridging two tax years makes this very difficult.
Permalink Submitted by [email protected] on Mon, 2011-02-28 21:22
Thanks for your thoughtful response.
Any thoughts about deeming the December, 2010 distribution as the first of a new set of 5 payments? My concern is that the 1099s won’t match up with 2010 being double what subsequent years will be.
No other 1099s on this IRA for 2009.
Permalink Submitted by Alan Spross on Mon, 2011-02-28 22:50
That might be possible, except that for a new plan starting in 12/10, the interest rates are much lower than they were a year earlier. That means that the 72t calculation will not generate a distribution that large unless the account balance grew enough from late 09 to 11/30/2010. Calculate what the 72t distribution would be using that 11/30/10 account balance and the highest interest rate for either Oct or Nov to see if you can generate a distribution equal to the original calculation. If the calculation produces a larger amount, you can lower the interest rate to back into it, but you cannot raise the rate. Even if that worked, you would still have the penalty on the first 2010 distribution and another big problem is that you would have two years of distributions taxable in 2010. That might present as much of a tax bill as the penalty.